Apple, Netflix share the seesaw of greed and fear
The sharp movements in both stocks may reflect a value reality

Apple, Netflix share the seesaw of greed and fear
The sharp movements in both stocks may reflect a value reality -- then again, maybe not.
By TheStreet Staff Jan 25, 2013 1:29PM
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By Jonathan Heller

Nearly every trading day, I see more and more examples of what makes the markets so fascinating. Thought by many to be quite efficient overall, we often see quite the opposite as it applies to individual names.

For a value investor, that's what can create opportunity; inefficiency is a positive.

The sometimes incredible gyrations in stock prices are the result of what market efficiency theories can't adequately measure; human beings, with all of our biases, fears, and assumptions making decisions on what to buy and what to sell. We react to new "information" quickly; we tend to follow the herd. It's the "oscillation between greed and fear" (see TheStreet) as applied to individual stocks.

Thursday, we saw Apple (AAPL -2.48%) fall more than 12%, primarily due to slightly diminished expectations. The company went from being the darling of Wall Street to a pariah nearly overnight. This is not a high-flying tech-bubble-era name, with little revenue and no earnings; this company trades for less than 9 times trailing 2014 consensus estimates, and has net margins in the mid-20% range.

It's also "followed" by more than 40 analysts, so there should not be that many surprises in terms of new information. In September, shares breached the $700 mark, and this was a "must-own." Four months and a 35% drop later, and some believe that the company's best days are behind it.

Now Apple is a "mistake" made by investors, because they picked up some shares for $650 in November that are currently worth $450. Apple shares now trade at nearly the same level as one year ago; what happened in between was a circus of greed and fear. Was Apple really worth $700 just four months ago? Is it worth $450 now?

Netflix (NFLX +0.69%), on the other hand, has gone from rock star to pariah back to rock star. Shares jumped 42% Thursday alone, and are up more than 170% since October. The company was expected to report a loss for its latest quarter, but instead reported a modest profit, revenue slightly ahead of the consensus, and now, prospects are bright.

All of a sudden, Netflix is back in with Wall Street, which rewarded the company by nearly doubling its market cap in one day. It was not all that long ago that some high-profile players were shorting this name; its best days were "clearly" behind it. Now, it's a "must-own" name. Overnight.

The truth, for both of these companies may be somewhere in the middle. I don't own either, and am not writing this column to tout or pan them, but rather to make a point. Small investors need to be careful of the information that they act on, and especially in taking a very short-term focus.

When everyone and their brother is buying, when the hype is at its height, it's usually after the "easy" money, if there is such a thing, has already been made. Neither Apple nor Netflix as companies, are probably all that different than they were a few months ago. The stock prices however are remarkably different.

There are probably a lot of small investors kicking themselves today because they bought Apple at the "top." After all, it was a "must own," everyone was talking about it, and it was clearly going much higher. There may also be renewed interest in piling into Netflix, now that it is again back in favor.

I honestly don't know what either of these companies is worth, or where they are headed from here. What I do know is that as investors, in the short-term, we tend to bid up companies up beyond their true value, pricing them for perfection. Then we punish them too harshly when we realize that perfection is unachievable.

It's the oscillation between greed and fear, and too often, it's the small investor that gets hurt in the aftermath.

Netflix May Not Be Worth As Much As You Think
Market sizing
In the past, Netflix CEO Reed Hastings has said he believes the company ultimately has the opportunity to attract between 60 million and 90 million subscribers in the United States. There are around 115 million households in the U.S. today. Assuming only one subscription per household, Netflix has a long-term goal of achieving 50% to 75% household penetration. At the end of 2012, Netflix had more than 27.15 million domestic streaming subscribers, having added roughly 5.5 million subscribers in 2012. In Anders' most pessimistic scenario, Netflix doubles its U.S. membership to 54 million by 2018, slightly below the low end of Netflix's estimated long-term market opportunity.

However, Reed Hastings has admitted that Netflix doesn't have a compelling enough offering today to reach its goal of 60 million to 90 million subscribers. Whereas Netflix's legacy DVD-by-mail offering has a comprehensive catalog, Netflix has been selective when adding content to its online offering. As I wrote in January, the reason for this discrepancy is that the first-sale doctrine gives Netflix significant leverage against content owners in the DVD business. By contrast, streaming content is much more expensive, because Netflix has no alternative to get content aside from signing a licensing agreement. In light of Netflix's limited streaming video selection, it may be unable to generate the universal appeal that would be necessary to penetrate more than 50% of U.S. households.

Eventually, Hastings hopes to overcome this obstacle through the "virtuous cycle." According to this theory, as Netflix's subscriber base grows, the company will be able to expand its content budget, which will allow Netflix to offer additional content and therefore attract new members. However, growing competition, particularly from Amazon, will drive up content prices, making it harder for Netflix to afford a comprehensive content library, even if its total content budget grows.

On the most recent earnings call, Netflix CFO David Wells said customers have become more satisfied with the Netflix streaming offering because consumers have lowered their expectations and now understand that Internet TV services won;t have a comprehensive library like Netflix's DVD service. However, Netflix bulls (and management) need to lower their own expectations. With a less-than-comprehensive content library, Netflix shouldn't expect to reach the same level of household penetration as cable/satellite TV. Time Warner's (NYSE: TWX ) HBO, along with its sister station Cinemax, reaches approximately 41 million U.S. subscribers. Netflix, which is moving to a very similar business model (a few original series and a strong but not comprehensive selection of movies), shouldn't expect to grow much beyond that level. Netflix may seem inexpensive at $8 per month, but it also provides much less value than traditional cable or satellite TV, which includes much more content, including first-run TV shows and live sports.

Competition will be a killer
Netflix's second major challenge is the fierce competition from Amazon's Prime Instant Video. Amazon has shown a willingness to spend heavily on the Prime Instant Video content library and appears to view Prime Instant Video as a combination of a loyalty program and an advertising program. Prime customers tend to be the biggest Amazon customers, and Amazon is willing to run a loss on Prime subscriptions in order to add more Prime members and increase sales of physical and digital goods.

This creates a serious long-term competitive problem for Netflix. Amazon is essentially an irrational competitor that is willing to run the streaming video business at a loss over the long term. In February 2012, Amazon announced a major streaming agreement with Viacom that brought its streaming library to more than 15,000 videos. A little more than a year later, the Prime Instant Video library has grown by 150% to 38,000 videos, including key deals such as the recent agreement to become the exclusive streaming home of Downton Abbey.

Amazon seems to have outbid Netflix on a number of recent deals. While Netflix's management has shown admirable discipline in not chasing overpriced content, eventually the company will have to put more money on the table to keep its leading position in content or else risk losing market share to Amazon.

Financial impact
For a few quarters, Netflix may be able to grow its streaming contribution margin (18.5% last quarter) by increasing its subscriber count faster than content expenses. Customers won't immediately jump to Amazon even though it's rapidly catching up to Netflix in terms of content quality. However, over the next several years, Amazon's market share will grow as its content quality improves, and Prime Instant Video will compete more seriously with Netflix for users. At the same time, the increase in content costs will prevent Netflix from ever reaching its vision of a "comprehensive" content library, which will make it hard to grow the domestic subscriber base much beyond 40 million.

Cost pressure and slower revenue growth will probably cap Netflix's domestic streaming contribution margin around 20% to 25%, leading to a maximum contribution profit of approximately $1 billion, which doesn't include technology costs, G&A expenses, interest, or taxes. If this scenario comes to fruition, Netflix's domestic streaming business, by far the most valuable part of the company, is worth $2 billion to $3 billion, or $40 to $60 per share. Netflix shareholders could thus be in for a nasty surprise when the long-term growth they expect fails to materialize.

MASSIVE FRAUD LOOT WITH TOTAL PROTECTION AND LOOT WEAPONS FOR PROVEN CRIMINAL MF REED HASTINGS/GOLDMAN SACHS LED SCAM GANG CONTINUES WITHOUT ANY FEAR..................ONLY POSSIBLE IN USA

Manipulation by design
by appliedtechnicalaid .
The price of NFLX has been manipulated by design from NLFX management in connection with others
WAKE UP AMERICAN WAKE UP WAKE UP
by kmazraani . 1 minute 49 seconds ago . Permalink
Is there a shop lifting, seize lifting, capture lifting all...................liftings more than NFLX price scam? The government try a shop lifter who steals a Hamburger to feed him/her-self before die from hunger while millions who steal their food, dreams, life, ambitions..................are free and well protected. I have no investment in NFLX (neither long nor short) but I watch the sector closely. There is no clearer stealing and scam situation than NFLX's one. If investigators put their hands on the trading transactions and whoever getting involved in those trades will absolutely arrest most of them for fraud and much more. PLEASE WAKE UP.
ANOTHER FRAUD $500M OFFERING JUST AFTER 1 YEAR AGAIN: WHAT WAS SCAM "E' REPORT AND SCAM LOOT PUMP FOR DUMPS PROVEN CRIMINAL THUG REED HASTINGS SCAM GANG IN USA?

THIS CRIMINAL GANG RAN OUT OF CASH IN OCT 2011 AND SHOULD HAVE BEEN ARRESTED THAN AND SCAM POOP PAPER DELIST-ED BUT THESE CRIMINALS AT S.E.C. PROVIDE PROTECTION & FRAUD WEAPONS FOR MORE LOOT

Netflix Announces Proposed $400 Million Offering of Senior Notes
PR NewswirePress Release: Netflix, Inc. – 39 minutes ago
LOS GATOS, Calif., Jan. 29, 2013 /PRNewswire/ -- Netflix, Inc. (NFLX) today announced that it intends to offer, subject to market and other considerations, $400 million aggregate principal amount of senior notes due 2021 (the "Notes") through an offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act.

The interest rate, redemption provisions and other terms of the Notes will be determined by negotiations between Netflix and the initial purchasers.

Netflix will use approximately $225 million of the net proceeds from this offering to redeem its outstanding 8.50% senior notes due 2017, including expenses associated with such redemption, pursuant to the make-whole provision in the indenture governing such notes and intends to use the remaining net proceeds for general corporate purposes, including capital expenditures, investments, working capital and potential acquisitions and strategic transactions.

This announcement does not constitute an offer to sell or a solicitation of an offer to buy any of the foregoing securities, nor shall there be any offer, solicitation or sale in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful.

The Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements.

Netflix Narrowly Avoided Doom In 2013
Netflix (NFLX) CEO Reed Hastings is a spin-master, second only to Jeff Bezos. No matter what results Netflix reports, things are always sunny. Those who mock the old price increases and Quikster debacle forget that the stock rose on the day of the announcements. The latest slight of hand is the move to explore taking advantage of the current low interest rate environment, while stating that Netflix has sufficient cash on hand to fund expenses. This is not true. In fact, if Netflix had not issued additional debt, there is a strong likelihood of financial disaster in 2013.

This same argument was used last time Netflix sought financing in late 2011, but this time around, people seem to fully believe the argument. Ironically, Hastings' spin is more misleading than in 2011. I will provide a look at the massive content obligations due in 2012 (minimum of $2.45 billion). For those looking for a good story about Netflix, I suggest Rocco Pendola's piece from early January. Rocco is a story investor, not a numbers guy, but I believe few people in the world have a better grasp of the business model situation.

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